Minimum Distribution Requirements Satisfied by After-Tax Contributions

In a private letter ruling (P.L.R. 9840041), the IRS recently privately ruled that the distribution of after-tax contributions from a 401(k) plan could be used to satisfy the minimum distribution requirements imposed by Section 401(a)(9) of the Code. Taxpayer was a former participant in Company A's qualified plan (the "plan") which contained 401(k) deferrals, employer matching contributions and employee after-tax contributions. Taxpayer retired from Company A in 1991 but elected to defer receipt of benefits from the plan until his required beginning date. Section 401(a)(9) of the Code provides that a participant (other than a five percent owner) in a qualified plan must begin distributions from the plan by April 1 of the calendar year following the year in which he (a) attains age 70= or (b) retires. Taxpayer attained age 70= in 1997 and thus his required beginning date was April 1, 1998. Taxpayer's first distribution (for 1997) was due no later than April 1, 1998 and his 1998 distribution was due by December 31, 1998.

Taxpayer elected to have his entire account balance in the plan distributed in 1998, on or before April 1, 1998, with all eligible rollover amounts rolled directly to his IRA, and all after-tax contributions distributed directly to him. The after-tax amounts exceeded Taxpayer's minimum distribution amount on account of 1997 and 1998. Further, because the amounts distributed represented a return of Taxpayer's after-tax contributions, they were not included in Taxpayer's income. The IRS ruled that the distribution of after-tax contributions which exceeded the minimum distribution amount with respect to the plan for 1997 and 1998 satisfied the minimum distribution requirements imposed by Section 401(a)(9) even though such amounts were not included in Taxpayer's income.

Taxpayer was able to satisfy his minimum required distributions for two years without taking any distributions into income on account of 1997 or 1998. Consequently, it is important to consider the planning potential presented by after-tax contributions in qualified plans in planning required minimum distributions.